European markets extend gains, rising for a sixth day in a row on Tuesday as investors refocused on the upcoming earnings season and put trade worries aside, at least for now. Oil and gas stocks add to the overall positive sentiment, with crude oil prices continue to rise amid supply shortage fears. Meanwhile, two resignations in the UK government tempers gains in British shares, with FTSE 100 gains just 0.17 per cent to 7,701 due to some concerns over a potential political gridlock in the country. France’s CAC 40 adds 0.62 per cent to 5,431, while German DAX 30 rises by just 0.64 per cent to 12,624. US stock index futures post gains as investor focus shifts to earnings.
The US dollar continues its overnight recovery from three-week lows reached yesterday. European currencies are back on the defensive, with EURUSD is testing the 1.17 figure again, following failed attempts to challenge the 1.18 barrier. The positive momentum abated after yesterday’s Draghi speech as the ECB Governor confirmed that rates are expected to remain on hold until September 2019. The euro zone economic data added to the negative sentiment around the single currency. The ZEW July survey showed that economic outlook has been dampened by political uncertainty and by fears over escalation of international trade. From the technical point of view, the pair will likely manage to stay above the support that comes at 1.650, where the 20-DMA lies, as the bullish pressure on the buck looks limited so far. Otherwise, the recovery prospects will weaken further in the short-term.
GBPUSD is changing hands around the opening levels at 1.3260 after a brief spike to 1.33 which followed by a correction lower, to the area of 20-DMA at 1.3220. The pound looks quite vulnerable as the political future in the UK looks cloudy after the foreign affairs minister Boris Johnson and the Brexit chief David Davis resigned citing differences with the prime minister on Brexit issues. The UK economic data came out mainly on a weaker side, though the country’s GDP increased by 0.3% in May driven by services, up from 0.2% in April, which somehow capped the bearish momentum in the pair. The current stance in the pound looks neutral, and the overall sentiment round the greenback remains one of the key drivers for sterling. Is the short term, the price needs to regain the 1.33 threshold to avoid a deeper correction from the current levels.
USDJPY spiked to a 1.5-month high of 111.35 in Europe and has retreated marginally since then. The pair remains bid due to a broad-based USD rebound coupled with risk-on sentiment in the global financial markets. As long as trade war jitters remain on the back seat, investors will likely stay in positive sentiment amid bullish expectations ahead of the earnings season later this week. As such, the buck has a chance to revisit January tops after a break above the 111.40 area. On the other hand, much will depend on the Treasury yields dynamics. Should the 10-year yields halt the rise, the outlook for the pair will weaken.
Brent crude continues its ascent for a second day in a row, challenging the $79 barrier which is standing on the way to the key $80 threshold. Traders continue to weigh the risks of global supply shortage amid supply disruptions all over the world, in addition to current issues in Libya, Venezuela, the upcoming tight US sanctions on Iran and limited capacity. As long as these concerns prevail in the global market, Brent demand will remain high, and buying dips will stay an attractive strategy. The immediate risk event is the API report which could lift prices further should the release point to a decline in US crude inventories.
Gold prices failed to extend the recovery after yesterday’s jump to $1,265. On Tuesday, the yellow metal is on the defensive again, losing ground amid the resurgent USD demand across the board. Despite the bearish pressure on the metal has eased a bit lately, it remains vulnerable and unattractive for opening longs against the backdrop of limited corrections in the dollar within the uptrend that started mid-April. In the short term, the precious metal needs to regain the $1,255 region in order to target the recent highs again.
Nathan Lambert, Head of Global FX Analytical Department